Don't Be Fooled by These "Snap-Back" Rallies - Look for This Instead

Central banks to the rescue?

Good luck with that.

The U.S. Federal Reserve tried to swoop in and save the market panic with a 50-basis-point cut on Tuesday. But lowering rates, even a "concerted" lowering of rates by several central banks working together, in the face of already low rates, isn't going to be economically stimulative.

Central banks lowering rates now is like opening the barn door after the horses have already bolted.

Lower rates aren't going to get consumers out if they're scared to go out - or if they can't go out. They aren't going to induce capital spending by companies if companies don't know where demand will come from or when it will come back.

Besides, the flight-to-quality trading that's driven hundreds of billions of dollars into U.S. Treasuries, for example, has already lowered rates dramatically.

When the coast is clear and the coronavirus is behind us, central banks will have to start pulling back the stimulus they intend to flood economies with. Markets know that's the other side of lowering rates in an eventually passing crisis.

So no, lowering rates isn't going to put a hard and fast support under weak markets.

Markets are looking at economies and sales and revenue and earnings and profits... and now losses. Those economic realities are reflected in stock prices.

We're not out of the woods yet. But this will tell us when we are...[mmpazkzone name="in-story" network="9794" site="307044" id="137008" type="4"]

Looking and Listening for the "All Clear"

What will do us all much more good than a rate cut are two things: listening to what's happening with the spread of the novel coronavirus and looking for sustainable market support levels.

Even if markets level out at or bounce off support levels, investors still need to pay attention to what progress is being made on the coronavirus. Markets can find support and rally, but if there's no definitive good news on the global spread of COVID-19, all rallies and resting support levels are suspect.

Like what happened Wednesday when the market rallied 1,172 points, the day after falling 785.

"Snap-back" rallies on days after markets tumble aren't unusual.

For the most part, they start out as computer-driven rallies. If they're preceded by good news, meaning rallies in Asia and Europe before U.S. markets open, and U.S. futures are higher headed into the open, it doesn't take much for computer-driven buying to be followed by investor buy orders chasing the previous downdraft's bargain-basement prices higher.

Snap-back rallies can be swift and steep, on account of market mechanics.

One telltale sign that snap-back rallies are "head fakes" is if you see big jumps followed by quick fallbacks, followed by quick jumps, and fallbacks again. Patterns like that throughout the day are evidence of computer-driven trading. Humans don't make decisions that fast, and even if they did, they couldn't get orders to exchanges fast enough to move prices up and down hundreds of points in seconds. That's computers running the show.

Another telltale sign a snap-back rally is a head fake is if a huge rally is accomplished on low volume. That's not broad investor buying. That's just computers and some investors buying stocks at whatever "offer" prices are out there. Rallies on low volume are always suspect.

Not all snap-back rallies are head fakes. If they take benchmarks above support levels and those support levels hold, they can be a launching pad for more buying.

What's important in the coronavirus market is that snap-back rallies, or even solid rallies, don't get erased by bad breaking news about the virus.

Since markets quickly discount rumors and move ahead of news, including good news, an absolute all-clear bell doesn't have to be rung. Investors just need to know the tide has turned.

This means definitive news stating the worst is behind us, the number for new virus cases is decreasing globally, there's a vaccine that has passed all the trials and phases and ready to go - you get the picture.

Again, it doesn't have to be an all-clear - just an indication that the tide has turned favorably.

That's the bell investors should be listening for. Until we hear news of that caliber, all bets are off.

As far as support levels, the near support for the Dow Jones Industrials Average is 26,500.

If the average can consolidate around that level, generally trading above there for a while, that level could be a launching pad for stocks to make a run higher to 27,000.

If stocks get above 27,000 and hold that level, consider that a bullish sign.

If the Dow can't hold 26,500, its next support level is 26,000. Support there will be positive but isn't strong support.

Support at 25,500 is important; if the Dow can't hold there, consolidate and start to move higher, look out below.

The next support for the Dow is its 52-week lows around 24,680.

Below that support, all bets are off.

Now you know why we've got a way to go till we're in the clear.

As always, I'll be watching the markets closely to bring you the latest updates and indicators on this coronavirus situation. In fact, be sure to keep an eye out for the second part of my coronavirus report in the next few days. (For part one, click here.)

We may not be out of the woods just yet, but you can be sure that we'll get through it safely together.

Follow Money Morning onFacebook and Twitter.

About the Author

Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.

The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.

Shah founded a second hedge fund in 1999, which he ran until 2003.

Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.

Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.

Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.

Read full bio